Emerging markets are particularly vulnerable as households spend a larger share of their income on food, and agriculture plays a big role in their economies, raising the risk that central banks will have to keep policy tighter for longer.
Emerging economies already strained by the Middle East conflict face a new threat: a potentially powerful El Niño that could push up food prices and slow growth.
The U.S. National Oceanic and Atmospheric Administration is forecasting an 81% chance of a very strong El Niño through October-December period, potentially placing it among the most powerful events on record since 1950 and dubbed by markets as “super El Niño”.
The weather phenomenon, which typically occurs every two to seven years, is likely to bring drought to parts of Asia and heavy rains to parts of South America, threatening harvests and food supplies.
Emerging markets are particularly vulnerable as households spend a larger share of their income on food, and agriculture plays a big role in their economies, raising the risk that central banks will have to keep policy tighter for longer.
“We came into this year with many central banks thinking they had space to cut. And now we see central banks stopping cutting, and some of them are hiking,” said Gillian Edgeworth, a fixed income portfolio manager at Wellington Management.
“I don’t think we’re moving to a world where there’s rapid rate cuts in emerging markets in the second half of the year.”
Here are some key countries and regions affected:
INDIA BRACES FOR WEAK MONSOON
The world’s most populous country is among the most exposed because it depends heavily on the annual monsoon, which typically delivers nearly 70% of the country’s rainfall.
India’s Meteorological Department has warned rainfall could be the lowest in more than a decade, threatening crop yields and raising the risk of higher food prices.
India is the world’s largest rice exporter and second-largest sugar producer. The country has often proved resilient to El Niño episodes thanks to larger food stockpiles. However, with inflation above the central bank’s 4% target, analysts say a “super” El Nino could force it to tighten monetary policy.
ASIA FEELING THE HEAT
Higher energy and fertilizer costs are weighing on external balances and economic growth across much of Asia, complicating central banks’ efforts to stabilize currencies and contain inflation.
Central banks in the Philippines, Indonesia, Korea, Pakistan and Sri Lanka have already hiked interest rates at least once this year. A severe El Niño could keep borrowing costs elevated across the region through the start of the following year.
“El Niño is just going to make inflation more sticky,” said Gary Tan, equity portfolio manager at Allspring Global Investments.
“People are forecasting rate hikes for the second half of the year, especially for the South Asian countries, which are kind of the most impacted by El Niño such as India, Indonesia, Vietnam, Thailand.”
Weaker currencies leave Asian economies more exposed to higher import costs should food and energy prices rise further.